[Analytics] Leaders ease recession fears as US-China trade war bites

Economists are offering almost unanimously offering bleak readings of Singapore’s second quarter gross domestic product, which is estimated to be up just 0.1 per cent year on year. Photo: Bloomberg. Sketched by the Pan Pacific Agency.

Deputy prime minister Heng Swee Keat and the trade and industry minister have both emphatically underlined the island nation’s economic strength. But analysts say its crucial manufacturing sector, hit by the tariff tiff between Washington and Beijing, is likely to stay weak in 2019. Dewey Sim specially for the South China Morning Post.

Senior Singaporean government officials on Friday played down fears of a looming full-blown recession after economic growth hit a fresh decade low, but market watchers warned there would be no silver linings unless global trade improved.

The Lion City’s crucial manufacturing sector is reeling from the US-China trade war, leading economists to almost unanimously offer bleak forecasts for the year based on Friday’s early estimates of second quarter GDP – up just 0.1 per cent year on year.

But deputy prime minister Heng Swee Keat wrote on Facebook that the government was “not expecting a full-year recession at this point”, and said instead that there remained “areas of strength” in the entrepot economy.

The gloomy growth figures were even slower than the 1.2 per cent on-year growth recorded in the year’s first quarter, the previous low point for the past 10 years.

Heng, also finance minister, said the data reflected “heightened uncertainties and risks in the global economy, especially with the US-China trade relations”.

If that was not emphatic enough, trade and industry minister Chan Chun Sing also saw fit to weigh in. Also writing on Facebook, he said the steady pipeline of foreign direct investment this year gave confidence to the government that it was on the right track.

“Companies looking for a stable political environment, pro-business ecosystem, skilled workforce, progressive regulations, superior connectivity and rule of law, still see Singapore as an attractive destination,” Chan said.

Heng is the designated successor to Prime Minister Lee Hsien Loong, who is poised to step down after the country’s impending elections. Chan is widely seen as the island nation’s next No 2 leader.

Apart from the weak overall GDP growth, the latest figures showed manufacturing shrank by 6 per cent from the previous quarter, construction was down 7.6 per cent and the services sector was down by 1.5 per cent. The data bolsters rising talk that Singapore could be faced with a technical recession – defined as two consecutive quarters of economic contraction – in the third quarter.

Foremost among economists’ concerns is that the manufacturing sector, which accounts for about a fifth of the country’s US$360 billion economy, is unlikely see any kind of lift without a dramatic change in the trajectory of the tariff battle between Washington and Beijing.

Said Selena Ling, head of treasury research and strategy at OCBC Bank: “It is quite obvious that electronics and precision engineering sectors are bearing the brunt of the trade war tension, seeing as how manufacturing has shrunk for consecutive quarters.”

Suggesting that the electronics sector would remain weak in the next quarters entering 2020, Sian Fenner, lead Asia economist for Singapore at Oxford Economics, said export-dependent services would likely be “heavy losers”.

“We are looking at the transportation and storage as well as the wholesale sector … they are likely to remain under heavy pressure given the weak global backdrop,” Fenner said.

Against the backdrop of impending recession, Ling said she did not expect “major reactions” from the labour market, but added that employers were likely to exercise caution when hiring.

Labour market data released last month showed the number of retrenchments in the city state rose some 40 per cent in the first quarter due to job cuts in the manufacturing sector.

Heng in his statement hinted that the government was prepared for a bump in unemployment: the deputy premier said officials were “working with employers and unions to prepare for all scenarios”.

Fenner said it was possible that the unemployment rate would “inch up a little bit”, though wide-scale retrenchment was unlikely due to firm macroeconomic policies and a fair outlook for the construction sector.

One possible cause of action for the government is an easing of the Singapore dollar to boost exports in the short term. Seven of 11 economists polled by Reuters on Friday said they expected the Monetary Authority of Singapore (MAS) to loosen policy during its semi-annual meeting in October.

The MAS tightened monetary policy twice last year in efforts to control rising price pressures and strengthen its currency – its first such tightening moves in six years.

The central bank manages monetary policy through exchange rate settings rather than interest rates, letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed policy band.

The MAS can use several tools to change policy, but most commonly it will adjust the so-called slope of this band, which determines the pace at which the currency can move.

Jeff Ng, chief economist for Asia at Continuum Economics, said in his view the chances of MAS flattening the slope had risen to 40 per cent.

“A lot of central banks are also looking at cutting policy rates, such as India and Korea, to join in the easing cycle and cut more, in India’s case,” he said.

Ling from OCBC also suggested a 40 to 50 per cent probability that the central bank would unwind tightening measures in the form of a slope flattening.

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Pan Pacific Agency is a News & Analytical Agency on the domestic and cross-border policy, economy and interstate relations of the largest Pacific countries from West America to South-East Asia and Oceania, including Indo-Pacific Region.